11/21/2011 12:18 pm ET Updated Jan 21, 2012

The Progressive Case for Moving Backward

2011 is 1968 in reverse.

As political scientist Ivan Krastev put it: "the students on the street [in 1968]... declared their desire to live in a world different from the world of their parents. Now students are on the street to declare their desire to live in the world of their parents."

This, of course, doesn't mean regression to the racism, sexism, colonialism, Cold War militarism, and ecological recklessness of earlier times. No one is camping in Zuccotti Park dreaming wistfully of Dwight Eisenhower.

But many are envisioning a return to the relative economic stability, robust social safety nets, and shared gains of the time before governments -- prodded by banks -- retreated from the goal of full employment and forced open the Pandora's Box of financial deregulation. It's not beyond the realm of possibility to make this U-turn happen.

For all their faults, the decades following World War II were marked by more significant social and economic advances, drastically fewer bank failures, and decidedly less income inequality than the current era. This was not an accident.

The global financial system of those days, while imperfect, emphasized economic stability over the free movement of capital. John Maynard Keynes, the key intellectual architect of that system, not only prioritized allowing governments to maintain the fiscal and monetary policy options to achieve full employment, but also the authority to limit large movements of currency in order to stop destabilizing speculation. In the US, the risks of investment banking were walled-off from everyday commercial banking. Watchdogs including the Securities and Exchange Commission brought serious oversight and transparency to Wall Street. The system was built on recognition that violent market swings have serious human consequences.

While the US government was divided and acrimonious as always, it was generally united on the point that the public sector should spend what's necessary to offset private spending cuts and keep people working. Officials almost uniformly understood the need for a broad middle class to drive demand for goods and services. As Nixon, a fierce free-marketeer, reportedly put it, "we're all Keynesians now."

The upshot was willingness to apply public funding to big undertakings from the interstate highway system to single-payer healthcare for the elderly to the moon landing. It was also a legacy of substantial and shared gains. In spite of more regulation, higher top marginal tax rates, and deviations from what might today be called "market discipline," the US experienced strong and sustained economic growth. The median inflation-adjusted family income grew only one-fifth as much in the period between 1980 and 2007 as it did in the period following World War II.

Of course, there's no one single reason this system unraveled. The demise of the dollar-reserve system, oil shocks, and the rise of manufacturing in the Global South all wore down the system's pillars. Yet considerable blame belongs to very deliberate policy changes enacted by governments, particularly the US, acting at the behest of the financial sector.

As Harvard economist Richard Parker has argued, the collapse of demand for loans amidst a stagnant economy in 1982 prompted the Reagan administration to loosen regulations on lending. These actions facilitated the Savings & Loans crisis that followed that decade and opened the flood gates to deregulation as a means of compensating for lackluster growth in the production of real goods and services. Profits poured into finance, insurance, and real estate, as the US -- cheered by laissez-faire ideologues -- built a new comparative advantage in this phantom economy. As the Nobel Laureate economist Joseph Stiglitz has explained, these exorbitant economic gains created a vicious spiral in which "rich rent-seekers use their wealth to shape legislation in order to protect and increase their wealth -- and their influence." And they have.

The crescendo came in late 1990s as Congress tore down barriers to many forms of securitization (the smoke and mirrors tricks that eventually concealed toxic loans) and demolished the firewall between commercial and investment banking, the Glass-Stegall Act. With global interest rates at historic lows, financial firms became more and more interested in complex innovations and risky moves to eke out profits from razor-thin margins.

Government-enabled excesses in the housing markets would have produced a bubble in the 2000s even without these changes. Yet this became the mother of all bubbles -- an $8 trillion pile of mispriced assets -- precisely because Wall Street gamblers were allowed to place deceptive bets with 30-to-one leverage. Millions of innocent people lost their livelihoods because the system of safeguards had been gutted.

Risk was socialized, rewards privatized.

But they need not continue to be. People are now taking to the streets to seek a return to sensible policies such as the Volcker Rule, which would prohibit commercial banks from engaging in risky trading with their own accounts, as well as levies on destabilizing short-term financial transactions.

Imagining a different system is by no means utopian fantasy. To the contrary, it's about restoring the very traditional view that the real economy -- useful goods and services -- should be valued more highly than a phantom economy comprising arcane instruments expertly designed to fiddle a quick buck.

Don't let the dreadlocks fool you: There's a profound conservatism about Occupy Wall Street.